What Is an Investment Portfolio & How Does It Work?

Investing can be a great opportunity to build for the future and generate some additional income. That being said, understanding investing takes a while and can be difficult.

Your investment portfolio refers to how you invest your money, which can include stocks, bonds, mutual funds, REITs, and more.

As a beginner, it’s important to learn how to build a diverse investment portfolio, and we’re here to introduce you to the basics. 

If you’re looking for investing portfolio tips for beginners, keep reading or use the links below to get started.

• Investment Portfolio Definition
• Risk Tolerance & Investment Portfolios
• How to Build an Investment Portfolio
• Key Considerations When Building Your Investment Portfolio
• Start Building Your Portfolio

Investment Portfolio Definition

There are several different types of investments you can choose when it comes to investing. Most people choose a combination of a few different types of investments, that way they’re not relying on the success of any one investment. 

This is known as diversifying your investment portfolio. 

So, what is an investment portfolio? An investment portfolio is essentially a group of assets that an individual has invested in, which can include a diverse variety of investments. 

While one investment portfolio might consist of only stocks and bonds, another may include stocks, bonds, mutual funds, REITs, and more.

As an investor, you may want to consider taking the time to build a diverse portfolio that includes various types of investments. By diversifying your portfolio, you could potentially reduce your risk in the event that one of your investments doesn’t go as planned.

If you put all your eggs in one basket, so to speak, you could find yourself in a more precarious position.

Types of Assets You Can Include in Your Portfolio of Investments 

You have a lot of choices when it comes to the different types of assets you can invest in to build your investment portfolio. There are a number of both long and short-term investments that you can choose from.

It’s important to consider the influence the investments you choose could have, such as:

• Potential risks
• Opportunity to earn higher profits
• How much you have to invest to get started

Here are some of the different types of assets you can include in your investing portfolio:

• Stocks: Stocks are actually one of the most common types of investments. You could invest in a company and potentially earn money in the form of appreciation (if the stock value rises) or dividends, depending on the stock. This allows you to bet on several different companies.
• Bonds: In simple terms, bonds are loans that you provide to the government or to a corporation. By loaning this money to the government or a corporation (i.e. buying a bond), you can earn interest on your loan.
• Certificates of deposit (CDs): A certificate of deposit (CD) is a lot like a standard savings account, only they typically come with much higher interest rates. You agree to leave a set amount of money in a bank account, and the bank agrees to pay interest on that money in exchange.
• Mutual funds: Mutual funds are groups that combine money from numerous individual investors, then use that money to invest in things like stocks and bonds. By investing in a mutual fund, you can diversify your investment portfolio without taking the time to build it up on your own.
• Exchange-traded funds (ETFs): Exchange-traded funds (ETFs) track specific industries, commodities, or other assets. You can buy and sell ETFs on the stock exchange, however, which makes them a more accessible investment. There are stock ETFs, bond ETFs, commodity ETFs, currency ETFs, and more.
• Option: Options contracts give the purchaser the right to buy or sell an underlying asset at a set price by a specific date. These contractors have an expiration date, at which point the purchaser can no longer exercise the option. The two main types of options are known as “calls” and “puts.”
• Annuities: Annuities are offered by insurance companies, allowing you to invest money in return for payments in the future. You start by making several payments or a large lump-sum payment, then you begin receiving periodic payments once your fund has been annuitized.
• Commodities: Commodities are everyday resources, including oil, gold, and food. You can invest in these commodities through physical ownership, or you can invest through stocks, ETFs, ETNs, mutual and index funds, and commodity pools.
• Cryptocurrencies: Cryptocurrencies like Bitcoin are becoming an increasingly popular investment opportunity. Because there’s a limited supply of these cryptocurrencies, the idea is that they’ll continue to increase in value. Investors can buy and hold cryptocurrency in the hopes of earning money off of appreciation.
• Precious metals: Precious metals like gold, silver, and palladium have always been popular investments. Buying and holding raw precious metals gives investors the opportunity to earn money if those metals increase in value as a result of their rarity.

Risk Tolerance & Investment Portfolios

While there are a lot of ways you can invest, it’s important to understand how to build your investment portfolio as it relates to risk tolerance. 

However, it’s important to note that there’s no way to completely avoid the risks associated with investing. 

Certain investments are inherently riskier than others, and you may not be in a position to take risks depending on your financial situation. The amount of risk you’re willing to assume through investing is known as your risk tolerance, and it’s a key part of how to invest with a portfolio.

If you have a substantial income or a large amount of money to invest, you might not be as worried about losing small amounts to various investments. However, those same losses might be a major setback for beginner investors who don’t have a lot of capital. 

If you have a low-risk tolerance, you may want to consider investments that are generally less likely to result in large losses. That being said, it’s important to keep in mind that these low-risk investments also come with smaller returns.

Because low-risk investments typically offer smaller returns, many investors prefer to balance low-risk and high-risk investments with the goal of minimizing risk while maximizing their potential return. 

You can choose to make your investment portfolio:

• Conservative: This type of portfolio is usually characteristic of investors with a low risk tolerance who are most focused on trying to preserve and slowly grow the money they’ve invested.
• Moderate: A moderate portfolio falls in between these two categories, and is characterized by a moderate level of risk.
• Aggressive: This type of portfolio is usually characteristic of investors with a high risk tolerance who are willing to take chances in hope of earning the largest return possible.

If you’re just getting started with investing, you may want to talk to a financial advisor about your risk tolerance, investment goals, and how to build a portfolio that is best suited for your financial situation.

How to Build an Investment Portfolio

As an investor, building an investment portfolio is a key risk management strategy if you want to try to maximize how much you can earn on your investments. That being said, there are a lot of factors that go into deciding which investments are right for your portfolio, so building an investment portfolio can be difficult.

You can start by figuring out what your investment goals are, and how much risk you’re willing to take on through investing. 

Once you’ve figured that out, you can start looking at the different types of investments that are available to you. Some of the most common investments in a portfolio include stocks, bonds, mutual funds, and ETFs.

In order to build a diverse investment portfolio, you may want to consider spreading your money out across different types of investments. You can do this by choosing different types of investments, or you can simply choose a diverse selection of stocks and bonds. 

The goal here is to avoid putting all your eggs in one basket as they say.

Key Considerations When Building Your Investment Portfolio

Beyond understanding the basic investment portfolio definition, there are also some important factors to consider when you’re building an investment portfolio. 

Here are some tips to consider when you’re building your investment portfolio:

Long-Term Goals

Are you looking to build your retirement fund with your investment portfolio? Generally, investors focused on retirement focus on moderate to high-risk investments now and shift to a more conservative investment strategy as they get closer to cashing in their investments.

Risk Tolerance

How much risk are you comfortable taking as a beginner investor? Think about how much money you can afford to lose and how much you’re willing to play with that cash when determining your risk tolerance.

Current Assets

What risk levels do your current assets carry? Are you looking to go all-in for the chance to potentially make a big return? Or are you looking to balance out that risk in your portfolio?

Financial Stability

Do you have extra income to invest? If so, how much? Are you financially stable to handle losing the money you’ve invested? These are just some of the questions related to your financial stability that you may want to consider carefully before you jump into building an investment portfolio.

Start Building Your Portfolio

Whether you want to save for retirement or put together a college fund for your child, investing is one opportunity to build wealth for the future. However, it also comes with the risk of losing that money, which is why many experts recommend a diverse investment portfolio.

Making informed investments is an important part of being able to manage your investments successfully, and hopefully, this guide and our other investing resources will help you prepare as you begin your investor journey and build your portfolio.

We also offer free tools.

If you need help investing, Mint is the simple solution. With the Mint app, you can track your investments to keep an eye on them and see if you’re on target to meet your investment goals or if you may want to consider making some adjustments. 

If you want to get started with investing, try Mint and see how much easier investing can be with the right tools.

This is for informational purposes only and should not be construed as legal, investment, credit repair, debt management, or tax advice.  You should seek the assistance of a professional for tax and investment advice.

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